Return on equity for power projects may be cut

The Central Electricity Regulatory Commission (CERC), in its draft regulations for terms and conditions of tariff issued today, signalled a shift towards a regime of lighter regulation.

The draft guidelines also propose a reduction in the post-tax return on equity from the current 16 per cent to 14 per cent for Central public sector undertakings (CPSUs) and private projects in which the government has provided payment security. For other private projects, it has been pegged at 16 per cent.

CERC stopped short of realigning the rates to match the Reserve Bank of India rates as a lower rate of return could make the sector unattractive for potential investors, CERC officials said.

The guidelines, applicable from April 1, 2004 to March 31 2009, would enable regulatory certainty for power sector players, the officials said.

CERC hopes to finalise the terms and conditions by April 1, when new tariffs will come into force, and has invited comments by January 23.

The new terms and conditions will apply to all inter-state generating and transmission utilities including the National Thermal Power Corporation, National Hydroelectric Power Corporation and PowerGrid Corporation of India Ltd as well as inter-state private projects.

The regulator, in a statement, said the new regulations would be applicable only to projects taken up on a cost-plus basis, while tariffs for projects coming through the bidding route would be adopted by it. CERC also proposed a 70:30 normative debt-equity ratio and said capital costs would be admitted by the regulator.

CERC has hiked the incentive level for thermal generation units from 77 per cent plant load factor (PLF) to 80 per cent PLF. It has also raised the rate of incentive to 25 paisa from 21.5 paisa per unit. For run-of-river hydel power stations, the performance benchmark of availability has been raised to 90 per cent PLF from 85 per cent PLF. According to the CERC officials, the increase in incentive rate will offset the rise in the threshold level for incentives.

The regulations also propose reimbursement of income tax by beneficiaries for core activity and its subsequent adjustment. It has also retained a provision for developmental surcharge for fresh capacity additions for another five years.

To ensure grid discipline, rates for unscheduled deviations from generation and withdrawal schedules have been revised upwards. Depreciation has been permitted at rates to be specified by CERC. Also, advance against depreciation to meet debt service obligations and repayment period for loans has been fixed at 10 years as against the present 12 years.

The new guidelines also proposed that the Centre should issue the rules for competitive bidding under Section 63 of the Electricity Act, 2003, doing away with the need for detailed regulation.

Power draft

• The draft guidelines seek to do away with the need for detailed regulation of the power sector
• The draft proposes a reduction in the post-tax return on equity from the current 16 per cent to 14 per cent
• CERC also proposed a 70:30 normative debt-equity ratio
• Rates for unscheduled deviations from generation and withdrawal schedules have been revised upwards
• The norms will be applicable from April 1, 2004 to March 31, 2009